The difference between 3-month LIBOR and overnight indexed swap spreads for three months are at extremes for the year. We would have to go back to August 2007 to see these levels. Certainly this is a clear indicator of banking problems especially in the EU.
Still we need to place this in perspective. The levels seen today were present when this crisis began with funding problems in August 2007. Losses in sub-prime and Freddie/Fannie were just coming to light. The LOIS levels stayed high and only further increased in 2008 peaking at the end of the year. 2009 was a transition period with calm starting to settle in the banking sector after March 2009. The bottom in LOIS spreads were hit at the beginning of 2010 and has now started to move in the opposite direction. It can move a lot wider, but there is less that the Fed and other central banks can do to lower rates. It is unlikely there will be more bail-outs so investors may have to be more careful about the banks they do business with. Do not expect these spreads to tighten soon.
Still we need to place this in perspective. The levels seen today were present when this crisis began with funding problems in August 2007. Losses in sub-prime and Freddie/Fannie were just coming to light. The LOIS levels stayed high and only further increased in 2008 peaking at the end of the year. 2009 was a transition period with calm starting to settle in the banking sector after March 2009. The bottom in LOIS spreads were hit at the beginning of 2010 and has now started to move in the opposite direction. It can move a lot wider, but there is less that the Fed and other central banks can do to lower rates. It is unlikely there will be more bail-outs so investors may have to be more careful about the banks they do business with. Do not expect these spreads to tighten soon.
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